Rural Demand and Volume Growth

The performance of Fast-Moving Consumer Goods (FMCG) companies in Q3FY24 has been shaped significantly by two key factors: the extent of margin recovery and the state of rural demand. Unfortunately, only the former played out as anticipated, leaving a noticeable impact on volume growth. This is evident in the case of Hindustan Unilever Ltd (HUL), a major player heavily reliant on rural markets. In the three months ending September (Q2FY24), HUL reported a modest sales growth of 3.6% year-on-year, marking the slowest expansion in at least nine quarters

Outlook for Q3FY24

Despite expectations of a festive season boost, the outlook for FMCG companies in Q3FY24 remains less optimistic from a demand perspective. A recent FMCG dealers channel check report by Antique Stock Broking indicates that retail inventory increased due to lower secondary sales compared to primary sales. This was attributed to lower-than-expected off-take growth during the festive season and delayed winter.

Competition from unorganized sector

Compounding the challenges faced by FMCG companies is the escalating competition from the unorganized sector, especially in high-penetration product categories such as tea, soaps, and detergents. Local FMCG companies have capitalized on this trend, making a comeback fueled by softening commodity costs, thereby bolstering their pricing power. In response, listed FMCG companies have resorted to price cuts to reclaim market share from their local counterparts, though the effectiveness of this strategy remains uncertain.

Projection for Q3 and beyond

Projections indicate that volumes for most staple companies are likely to remain subdued in Q3, especially in rural India. For instance, Dabur India Ltd is expected to experience low-single-digit volume growth in Q3, consistent with the 3% year-on-year growth observed in the previous quarter. The broader outlook for 2024 appears clouded, with no discernible green shoots on the horizon in the near term. This cautious sentiment is reflected in the stock performance of FMCG companies heavily exposed to rural markets, such as HUL and Marico, which have seen modest gains of 1% and 4%, respectively. In contrast, Dabur has witnessed a decline of nearly 6% in the year 2023.

Nifty FMCG Index and Specific Company Performance

Comparatively, the Nifty FMCG index has seen a robust upswing of nearly 26%, largely propelled by the performance of ITC Ltd, whose shares surged by 38%. This positive momentum for ITC can be attributed to a lower-than-expected increase in cigarette taxes in Union Budget 2023 and overall improvements in its business operations. However, it is worth noting that growth in its cigarettes business is now moderating, partly due to a higher base.

Profitability and Gross Margins

Examining profitability, most FMCG companies are anticipated to register a year-on-year increase in gross margin in FY24, signaling a positive shift after two consecutive years of decline. This is primarily attributed to the generally favorable trend in raw material prices, particularly the decline in commodity prices such as crude oil. Nonetheless, a degree of caution is warranted, given the recent uptick in prices of certain agricultural commodities in Q3, including wheat and sugar, which have seen sequential increases of 6–7%.

While the overall commodity cost basket in Q3 has decreased by 2.4% year-on-year, it has inched higher sequentially by 0.5%. This dynamic is driven by a rise in the agricultural basket, offsetting declines in non-agricultural commodity prices.

Conclusion

In navigating the complex landscape of Q3FY24, FMCG companies find themselves at the intersection of challenging rural demand, intensified competition, and evolving commodity prices. The road ahead demands strategic resilience and adaptability to overcome these hurdles, ensuring sustained growth in a dynamic market environment.

Probable Reasons:

• Unseasonal rains
• Slump in rural GDP growth
• Absence of sustained rural revival
• Competition from Unorganized FMCG

Looking ahead

• Increasing e-commerce penetrations
• Premiumization in urban market
• Increasing rural distribution network